Investment News and Notes for Q4

[corner-ad id="5"]

The Canadian Real Estate Market in 2022

Most Canadian real estate companies have fared well during the COVID-19 pandemic. So, most are optimistic about 2022, due to the promising signs of strength for several asset classes. With so much force for change reshaping Canadian markets, and rising concern about housing affordability, it becomes necessary to think differently.

We must re-examine the basic demand and supply relationship, while accelerating transformation and innovation. Many analyses have shown that the best bets in the Canadian real estate market include warehousing and fulfillment, rental housing and uses related to health care and life sciences.

Reviewing the Shifting Market

We’ve seen significant workplace shifts ranging across the real estate market. While Canadians have diverging opinions on how permanent the changes are, and what the future of work will ultimately be, there’s no doubt that the workplace will be different from what it was before 2020. This has implications for business decisions across key asset classes, as well as for the users of real estate themselves.

Key trends include a changing landscape for offices, different migration patterns, and a stronger focus on master-planned communities. In Canada’s residential market, low interest rates, increased savings by many Canadian families during the pandemic, and the desire for more living space has helped boost the demand for housing. Consequently, home prices and affordability challenges have both increased.

As 2021 comes to an end, we’ll examine two factors as we cross the threshold into a new year: rental rates and price appreciation.

Key Trend Rental Housing

After an unsteady 2020, the Canadian rental market continues to slowly recover, as the average asking rents across the country have increased month over month for the second half of 2021.

First, the facts: Unfurnished rental prices saw a +14.41% increase in December 2021. After a comparatively stagnant November, rent for furnished units saw an uptick across the GTA. In the Downtown core, the average price of a one-bedroom furnished unit rose +26.19%.

To preview rental rates for 2022, we’ll start with vacancy. From there, we can see where the market is bound to go. Typically, in Toronto, the vacancy rate is usually very low, approximately 2% or below for many years prior to the COVID pandemic. At the pandemic’s peak, vacancy rates were said to be close to 6% but by the end of Q3 2021, the rate had already dropped to a stable and normalized level at less than 3%. We always try to add context to these numbers, this means that over 97% of units in the city are occupied.

These figures bode well for the rental rates heading into 2022 and beyond, as a multitude of factors come into play to help spur recovery in the economy and the rental market. After working from home became necessary during the pandemic, 2021 has seen returns to the office and a decline in demand for home offices and separate spaces for virtual learning.

As the population attempts to return to normal from the pandemic, the rental market has returned to normal as well (see above rental figures).

Some of the factors that lead to a strengthening situation are University and College students returning to school, and immigration expected to reach new record-breaking levels. This leads most experts to believe that a stable but increasing demand for rental inventory is what we can expect. There are other factors (some we have written about here) that will also keep the market demand strong. Major developments and a growing number of high-profile tech companies moving their HQ or offices to Toronto constitute major draws to the city.

For pricing, there is a natural relationship between average rents and the rate of vacancies. In Toronto, as vacancy in the rental market rose, rents tended to go down. During the peak of the pandemic, the number of incentives given to renters increased.

The demand for larger rental apartment units has been increasing in the past two years. But at the end of 2021, we are witnessing the demand for smaller rental units begin to rise while the demand for larger units remains stable.

The average rent in Toronto is near $2,600, which paints a picture of the landscape. This figure reflects the normalizing of vacancy in the city of Toronto, and relatively higher-priced new developments which keep prices and options at normal levels. As we shift to talking about pricing, let us note a pertinent statistic. The price of condo rentals saw a relatively large increase compared with overall rental price. Rents in the Toronto condo market saw an 8.2% increase this quarter and a 3.8% increase year over year.

Key Trend Condo Price Appreciation

We hear a lot of superlatives about ‘staggering gains’ and ‘gold rushes’ in the detached housing market, in most parts of the country. This situation led to condominium sales surging throughout the first eight months of 2021 in the Canada’s major centres. The obvious reasons for the surge in condo sales were availability and affordability in this small period as the pandemic continued. A great result of this condo surge is the fact that a good amount of the credit for the increase is owing to younger buyers, a coveted subsection of most real-estate market types.

According to most analysts, market activity across the province should remain steady in 2022. We can expect continuing average price growth, with wide variations regionally (as you would expect).

Looking at the factors of pricing for Toronto real estate, condos specifically, we predict continued increases in 2022. You simply need to review the data to picture the trend. As a base, the historical average condo appreciation rate in Toronto (before the pandemic) was approximately 13% annually. However, condos in the G.T.A. have risen a total of 44% from the previous peak in 2017. From 2020 to 2021 the Toronto (proper) market saw a 7% increase, going from $986,000 to $1,054,000.

_

With that base of pre-pandemic and pandemic pricing, and with sales now back up to pre-pandemic levels, the outlook is good. It’s a great thing for condo owners to know that their investments have appreciated significantly over time, much to the credit of TCS’ investment program. Most forecasts show solid growth in condo sales and prices continuing as pandemic restrictions ease. As vaccination numbers keep climbing and pandemic restrictions ease, buyers have shot past the idea of eschewing high-density living. Savvy investors will not be deterred from the heart of it all, in one of the world’s best cities.

As we move forward, we can expect high equity gains for Toronto real estate, and for the city to continue as a prime location for condo investment. Recent Toronto Regional Real Estate Board (TRREB) data showed condo prices in the 416 area code rising by 52% since 2015. That figure includes the so-called mass exodus during the pandemic’s early stages. TCS has talked about this in the past, but Toronto is on the verge of becoming a “world-class city” for several reasons. We rise to that status in the spirit of New York, Miami, London, and Barcelona, but with property values well below the foreign cities. All of that room for price appreciation makes for good maneuvering in the investment space.

Conclusion

What can investors take from this information? For investors, the lowering of vacancy rates is a good thing, as is the ability to charge higher average rents. Owners will have an easier time finding tenants to fill properties then add in the fact that Toronto is in short supply of housing. The federal government is pushing for unprecedented and increased rates of immigration, with most of those people heading to Toronto and its surrounding areas, the outlook for price appreciation in 2022 and beyond bodes strong. A silver-lining to an already golden situation, is that we get to sit back and watch as our city becomes a major global, world-class, city. We’ll have front row seats to watch it happen.

TCS Brokerage Division

Secure Your Investments with TCS' full-time licensed and dedicated brokers

Lately we have been receiving a large number of inquiries about leasing, assigning and selling units through our brokerage division. Please note that we have a team of licensed, award winning, and dedicated full time real estate brokers on staff that are specifically retained by TCS to manage our ownership group's own properties as well as all those of our clients. This value-add service is part of our promise to provide full turn-key services so that all your investment needs are met under a one-stop-shop platform.

By working with TCS’ broker team members, you will be able to better secure your investments as we always aim to price-protect our investments so that we all win as opposed to outside brokers, who may have one or two listings and most likely won’t have the required relationships with the developer, the on-site property management team and the security service providers. A certain high-level expertise and building/project knowledge is needed to manage this intricate process and TCS has that at all its sites.

Don’t trust your valuable real estate investment portfolio to outside firms/brokers who aren’t in it for the long run and won't protect and serve your needs.

Toronto West Investment Opportunities

House of Assembly at Sterling Junction, Toronto.

Our most recent client offering in phase one of the master-planned community, House of Assembly, in the west end of downtown Toronto, has been a home run for investors. On the heels of the project’s success, TCS is looking for similar opportunities for our clients. Keep in mind, these projects can’t merely be in the target neighbourhoods – they must be applied against our investment scrutiny and standards.

We wrote earlier that in general the West part of downtown Toronto as well as the Etobicoke area are very popular and desirable neighbourhoods. These are now being developed at a much faster scale, as downtown Toronto has less sites available for hi-rise projects.

Ease of access is what makes the western part of Toronto one of the best places to live and invest in. Widespread highways and public transit can take you to all parts of Toronto and its many suburbs, the airport, downtown business core and of course the beautiful lakeshore. This was particularly true with the HOA investment offering, which carried a perfect transit score of 100.

A previous investment in this neighborhood was at the unique loft-style project, Stockyard District Residences, where we had investors purchase over 75% of the project in the $865 PSF range. At this time, the latest projects in this neighbourhood are being marketed in the $1,200 to $1,500 PSF range and as such, the cash-on-cash ROI’s have been significant.

As many long-time clients understand, the inherent value of master-planned communities has been an integral part of TCS’ value proposition. This will continue with our west Toronto development strategy. The HOA project was phase one of at least six phases. Our past Junction and Stockyards investments have become integral in those areas, in multi-tower zones where the same developers are constantly seeking new pockets of land to develop in additional phases of these projects.

The Stockyards District where we originally invested over four years ago is projected to see the creation of at least one thousand new residences, and many new streets that will complement a road extension plan. That is built on what is already an up-and-coming neighbourhood.

For example in mid-October, plans were submitted to the city for planning, zoning by-laws and subdivision applications for a new community in the Stockyards.

This project alone can deliver over 1,800 new residential units with offices, retail space, parkland and roads accompanying the development. Add this to the proposed Keele Street and Gunns Road extensions that are planned for the neighbourhood, and you get massive movement on a new area of Toronto. There are also proposals for a new GO station, adding to the allure of the area.

Currently in the neighbourhood, construction is still moving along with other projects. Watch for the yet-to-be released announcement that a Phase 2 project is being worked on by Greybrook Realty Partners and Marlin Spring in the coming year(s).

As for the Junction, we’ve talked about this area before and have brought several investment options to our clients there. But our research still shows that this area is increasing in popularity for families and others priced out of other neighbourhoods in Toronto, as well as younger professionals who want more space than a central core location provides them. This has been a clear and increasing trend since the pandemic hit.

The proximity to High Park is a major factor, along with several highly regarded schools, that contribute to the popularity of the neighbourhood. From an investment perspective, this neighbourhood has not seen the massive increases in property density that have touched other popular Toronto neighbourhoods.

There are many projects, including the master-planned community HOA that TCS clients were able to buy into during phase one. This creates a lucrative scenario and a value proposition that will not last much longer. As the window of opportunity closes, we are aggressively working on securing new projects for our clients, including the subsequent phases of HOA.

Ontario’s Task Force and Toronto’s Inclusionary Housing Policy

Toronto’s new mandate that developers include affordable housing in each development has sparked an interesting debate. TCS has long been a supporter of more housing and more affordable housing for our great city.

But the new policy by itself seems like a band-aid solution; something that does not address the root causes of the housing shortage in Toronto and the G.T.A. For real change to be made, bolder action is required.

Also of note, the province of Ontario has recently assigned a “Housing Affordability Task Force.” The task force may be able to remove some of the hurdles to housing construction province-wide, but it mainly serves Toronto.

The task force is to explore housing affordability measures such as:

• Increasing the supply of market-rate rental and ownership housing

• Building housing supply in complete communities

• Reducing red tape and accelerating timelines

• Encouraging innovation and digital modernization

• Supporting economic recovery and job creation, and

• Balancing housing needs with protecting the environment.

The task force’s objectives to remove red tape and spur innovation in the sector are most promising. But the city of Toronto’s policy really only touches on the first mandate from the province above, simply increasing the volume of market rate housing as a singular tactic.

TCS will continue to work with industry leaders and lawmakers both to share insights and information about this important topic. We advocate for innovative and effective policies, to make Toronto amazing for the people who live here.

TCS Highlights →